PARIS/LONDON (Reuters) -
Shares in France's biggest bank BNP Paribas fell sharply
on Friday on concerns a possible U.S. fine for alleged
sanctions-busting could be big enough to restrict its
dividends and force it to raise money to boost its
capital.

France's central bank said it was following the case "with the
utmost attention" after a report in the Wall Street Journal said the
U.S. Justice Department wanted $10 billion from the bank - double
the amount which had been previously reported.

BNP declined to comment on the report.

Shares in BNP dropped as much as 6 percent on Friday to their lowest
in more than eight months, slashing almost $5 billion off the bank's
stock market value.

The decline took its loss to 18 percent since Feb. 13, when the bank
first took a 1.1 billion euro ($1.5 billion) provision for a
potential sanctions fine as part of a total litigation provision of
2.7 billion euros.

"We donít dare accumulate more (shares) at this stage,Ē said Yohan
Salleron, fund manager at Mandarine Gestion in Paris, who cut his
exposure to the bank at the start of the year.

Analysts at Citigroup noted a fine of the magnitude reported would
cut BNP Paribas' capital ratio to below 10 percent - a level seen as
key to staying out the danger zone under tighter post-financial
crisis guidelines.

The latest round of European Union "stress tests" of banks'
financial health are under way with results due in October.

"This is not good news as we approach the stress tests, which BNP
cannot afford to fail. A capital increase may very well be a
solution," said Salleron.

"Potentially the bank may not pay a dividend for the next two years
... There is a very real reputation risk here. It could spook
certain counterparties into staying away from BNP," Salleron added.

The U.S. Justice Department's investigation is a criminal probe into
allegations that the French bank evaded U.S. sanctions against Iran
and other countries for years.

COMPLIANCE FAILINGS

The newspaper report said the final settlement could be less than
$10 billion. Still, the multibillion dollar figure would put the
fine among the largest penalties imposed on a bank and is far higher
than what BNP has provisioned for.

HSBC HSBA.L was fined $1.9 billion in December 2012 for compliance
failings in Mexico, which U.S. prosecutors said allowed drug cartels
to launder money, and for enabling clients to avoid U.S. sanctions
on dealings with countries such as Iran, Libya, Sudan, Myanmar and
Cuba.

U.S. regulators were criticised after that fine for being too
lenient on HSBC.

Investors also fear BNP could face being excluded from activities in
the United States should it fail to accept a hefty fine and want to
see a quick settlement to avoid continuing uncertainty.

France's government has said little about the issue since early this
year when the issue first came to a head. President Francois
Hollande was sharply critical of banks and their part in the
financial crisis ahead of taking power in 2012, calling the world of
finance his "main adversary".

An official of Prime Minister Manuel Valls' office said it was being
kept informed but the issue was "a matter between a private business
and U.S. justice".

However, since Credit Suisse agreed to pay more than $2.5 billion
for helping Americans avoid taxes, French central bank chief
Christian Noyer has expressed some concerns about U.S. prosecutors'
pursuit of European banks.

A week ago Noyer, also a member the European Central Bank's
governing council, said: "Obviously we are very attentive towards
risks related to what could be a development in American
jurisprudence."

A central bank spokeswoman said on Friday in response to a query
about the latest reports: "The Bank of France has no comment to make
for now since negotiations are still in progress. The governor of
the Bank of France is following this case with the utmost
attention."

The finance ministry and the office of Hollande also declined to
comment.

The bank's stock was down 5.2 percent at 49.88 euros by 0918 GMT.

(Additional reporting by Jean-Baptiste Vey and Brian Love, with
Sudip Kar-Gupta and Steve Slater in London; Writing by Andrew
Callus; Editing by David Holmes)